While many people think IRS audits are personal, they’re actually not.
In fact, audits are triggered based on how the agency’s computer system scores your return. The very introduction to the IRS’ Publication 556: Examination of Returns, Appeal Rights, and Claims for Refund states:
“If your return is selected for examination, it does not suggest that you made an error or are dishonest. Returns are chosen by computerized screening, by random sample, or by an income document matching program.”
So what are some of the major alarms that can trigger such audits and how can you avoid them? Let’s dive in.
Any inconsistencies—whether it be a different amount of income you’re reporting versus what’s reported by clients or employers, a mistake in your social security number, an incorrect bank account number, an incorrect filing status, or a misspelled name—can flag the IRS’ Automated Underreporter (AUR) Program.
The AUR program reviews tax returns and checks for discrepancies, matching the figures you report to past returns and those reported by others, so make sure you have all your ducks in a row. It also checks for mathematical correctness, which brings us to our next point…
Check, double check, and triple check that your numbers add up. While mistakes happen, make sure there are no sizable errors on your returns. While a human reviewing your return might not catch it—a computer will.
Therefore, if you’re filing your own return, inspect it closely, checking that all decimals and zeros are in the right place! And—on that note—don’t be tempted to include nice, round numbers. While it may look nice and/or make your bookkeeping easier, it’s not practical—and the IRS will flag it.
Only take the business deductions you’re entitled to. I repeat: Only take the business deductions you’re entitled to. That’s because if the IRS notices you’re taking suspiciously large, unusual, or otherwise out-of-the-ordinary deductions, an audit may be triggered.
In other words, deductions that don’t fall in line with the “norm” of what the IRS sees on other returns—let’s say extravagant entertainment, travel, or dining deductions—can trigger the system to review your return.
Other things to keep in mind: DO NOT mix personal and business expenses. This is a huge red flag for the IRS.
Ultimately, a good rule of thumb is to ensure that your expenses are ordinary, necessary, and in pursuit of revenue for your business.
Recommended reading: NOTICE: What Insurance Agents Need to Know About Their S-Corp Structure
Understanding the minutiae of what can trigger an IRS audit can be tiresome. Thankfully, there are tax experts that can help. At Club Capital, we make sure you’re covered—that all your “i”s are dotted are “t”s are crossed—so that your agency’s financial books are kept up to date and your tax return is filed correctly.
Don't worry, we’ll quadruple check for all possible calculation errors and other mistakes—we’ve got you.
Ready to learn how Club Capital's accountants can help your agency better manage its taxes? Schedule a demo today.